Fed's bond-buying spree sends big profits to Treasury

The Federal Reserve's controversial "quantitative easing" program of buying government bonds to stimulate the economy generated huge profits last year, resulting in the Fed transferring $76.9 billion to the U.S. Treasury in 2011, the bank said Tuesday.

WASHINGTON — The Federal Reserve's controversial "quantitative easing" program of buying government bonds to stimulate the economy generated huge profits last year, resulting in the Fed transferring $76.9 billion to the U.S. Treasury in 2011, the bank said Tuesday.

It was the second largest such transfer since the Fed was created in 1913, nearly enough to finance the 2012 budgets of the Departments of Justice and State combined.

Historically, transfers are far smaller. In 2004, as the economy hummed, the Fed transferred just $18.1 billion to the Treasury.

In 2010, however, as the Fed raked in interest payments from new purchases of government bonds and mortgage-backed securities, the transfer hit a record $79.3 billion.

Senior Fed officials, speaking only on the condition of anonymity in order to talk freely, confirmed that the bank's earnings remain very high compared with historical standards, reflecting the Fed's large purchases of government bonds in order to stimulate the economy.

In all, the Fed earned $83.6 billion in 2011 from taxpayer-paid interest on the government bonds it bought as part of its quantitative easing program. The effort was intended to drive down interest rates across the economy and force investors out of the safe government bond market into riskier investments, such as stocks, that would boost economic activity.

Usually, the interest that taxpayers pay on those government bonds goes to private investors. But since the Fed bought the bonds, it received the interest payments, which it then returned to the treasury. Fed officials on Tuesday called the quantitative easing effort a net gain for taxpayers.

The Fed purchased $600 billion in government bonds last year in a second round of big purchases and announced that as its bond holdings matured it would reinvest the proceeds in new bond purchases. Those actions swelled the Fed's balance sheet to about $2.5 trillion.

This second round of purchases was controversial due to its size and due to concerns that eventually the exercise could spark inflation that'd be hard to rein in. Many Republican lawmakers also viewed the Fed's effort as an end-around Congress, which enjoys power of the purse and had moved to halt additional government debts accrued for new stimulus spending.

The Fed's reported net income — revenues less expenses — of $78.9 billion in 2011 was slightly below the record $81.7 million reported for 2010. The primary reason for the drop was that many high-interest loans tied to the controversial bailout of insurance and finance giant American International Group moved off the Fed's books last year when AIG repaid $15 billion of the government bailout, officials said.

The Fed also paid out about $1 billion more last year in interest payments to banks on money held in reserve at Federal Reserve banks across the country. Since 2008, the Fed has paid 0.25 percent interest on this money, and some critics charge that this gives an incentive for banks not to lend money to consumers and businesses.

Tuesday's numbers were unaudited and preliminary. A fully audited account of the Fed's financial activities in 2011 is due in March. It will include adjustments in the valuation of the Fed's complex ties to the rescue of AIG and the failed investment bank Bear Stearns. They're valued through Sept. 30 in Tuesday's disclosure.

The numbers released Tuesday would have reflected an even larger transfer to the treasury if not for new funding of the Consumer Financial Protection Bureau. The Fed spent $242 million to, along with the Treasury Department, get the bureau up and running. Another $40 million was spent to establish the Office of Financial Research, charged with assessing risks to the economy. Both these agencies were established through landmark financial legislation that passed in 2010.

Under that measure, the Consumer Financial Protection Bureau is funded through the Fed's earnings, something that bothered congressional Republicans, who wanted to starve the agency they oppose through the appropriations process. For much of 2011, they blocked the confirmation of the Obama administration's choice to head the agency, Richard Cordray.

In a controversial move last week, President Barack Obama used his presidential powers to install Cordray through a recess appointment when Congress wasn't officially in recess. Opponents view the move as unconstitutional, and a legal challenge is expected.